Capacity to contract
In the case of general contracts, a person with mental incapacity is bound to the contract in the same way as someone with no mental incapacity. The exception will be if the person with a mental incapacity (or a person authorised to act on their behalf) can show that they did not understand what they were doing. If this can be shown, the contract is void.
In Scottish law, it is not necessary for the creditor to have known of this incapacity at the time the contract was taken out.
There is an exception to this rule existing in law, and that is when the person is contracting for ‘necessaries’. The meaning of the term ‘necessaries’ depends on the facts of the individual case. Things that are relevant include the particular circumstances of the person, the actual need and what the purchased item will be used for. Food, lodging, clothing, medicine, medical attention and education are all generally recognised as necessary.
There is a common law (law made through court rulings) presumption that even a person who has mental incapacity may be held liable and expected to pay a reasonable price for necessaries. This presumption also appears in statute law contained in section 3 of the Sale of Goods Act 1979.
Section 3: Capacity to buy and sell
(1) Capacity to buy and sell is regulated by the general law concerning capacity to contract and to transfer and acquire property.
(2) Where necessaries are sold and delivered to a minor or to a person who by reason of mental incapacity or drunkenness is incompetent to contract, he must pay a reasonable price for them.
(3) In subsection (2) above ’necessaries’ means goods suitable to the condition in life of the minor or other person concerned and to his actual requirements at the time of the sale and delivery.
A client who enters into an agreement while incapacitated mentally cannot be bound by that contract (excluding necessaries), although the burden of proof is on the person trying to avoid being bound by the contract. This is because there is a presumption of capacity.
The issue could be more complicated where the client has entered a contract while incapacitated, such as a credit card. The effect is the agreement is void – ie, it did not exist. However, should the client recover mental capacity (either fully or for a period) and make additional transactions using the credit card, they may be held responsible for these. As a matter of good practice, when someone is incapacitated and enters any agreement or transaction and then recovers, they should immediately rescind the agreement or transaction with their creditor.
Contract law is very complex, and this is mainly due to the fact that it is based on case law that develops over a substantial period of time rather than through government legislation in a single Act. Mental health issues are more relevant today than ever before and this is primarily due to the increase in personal debt and the cost of living crisis with the resultant problem debt that emerges for a number of socially patterned groups, including those with mental health difficulties.
To be able to help clients in this area, it is essential that debt advisers are aware of the legal position, approach creditors from the correct perspective, build relationships with other professionals, and keep up to date with pending changes in the field of debt and mental health.
Debt advisers who are unsure how to proceed should approach a more experienced debt adviser or contact the MATRICS team.